Filed under: Taxes
On the list of things you hate, somewhere in there is probably learning that something you didn’t think you had to pay tax on, you do.
Any money that comes into your life can be taxable, says San Diego-based tax attorney Sam Brotman.
“Technically, under Internal Revenue Code Section 62, the IRS can find a way to tax almost every way of receiving money … Even finding $ 20 on the street would be considered taxable, and the IRS would want their fair share of the money that you receive,” he says.
On a practical note, Brotman says most people don’t report that $ 20 bill, and “the reality of the situation also is that the IRS does not have enough enforcement resources to come after people who forget to declare little items on their return. It would cost them more to come after those people than they would get in tax revenue for the government.”
Still, $ 10 you won from a lottery ticket and $ 1,000 in winnings is another story. If you want a heads up on what unusual monetary situations are taxable, and what you should be reporting when you file, read on.
Employee awards. Were you an especially productive employee last year? You may have some bad news coming.
“Rewarded for doing good work? Cash awards or bonuses from your employer are taxable. So are vacation trips for meeting sales goals,” says Robin Solomon, a tax and benefits attorney with Ivins, Phillips & Barker in the District of Columbia.
On the plus side, Solomon adds, “An exception applies for noncash employee achievement awards – such as a gold watch or iPod shuffle – presented for your length of service or safety achievement. These are generally not taxable if valued below $ 400.”
The same goes for other nominal (that is, cheap) holiday gifts, Solomon says. So if you were given a Christmas ham, she says you don’t have to worry.
Gambling wins. When you win the Powerball, the IRS takes a nice chunk of that money. But did you know it is entitled to smaller lottery wins, too?
“Any gambling wins, including lottery and fantasy sports, are income,” says Bob McKenzie, a Chicago tax attorney with Arnstein & Lehr. But there is an upside, he adds: “You can deduct your gambling losses against winnings.”
Money won in a lawsuit. You sued someone or settled out of court, and it all worked out in your favor. It’s not all good news, unfortunately. You may have to pay the IRS, says Michael Eckstein, a tax accountant based in Huntington, New York.
“Unbeknownst to most, legal settlements and awards can be taxable. Their taxability is usually complicated and often depends on the details of a particular case,” Eckstein says. “To oversimplify things, the taxability of compensatory damages depends on what loss the award was meant to make whole, whereas punitive damages are generally taxable.”
Canceled debt. If you’ve been financially struggling for a while and finally achieved a minor or major victory, talk about disappointing news.
“If you are in financial trouble and are able to negotiate a cancellation of all or a portion of your debt, whether it is a mortgage, credit card or other personal loan, the amount canceled is considered income to you,” says Anthony Criscuolo, a Florida-based certified financial planner with Palisades Hudson Financial Group. (For those wondering, debt canceled in a bankruptcy case is a different matter, and you won’t be taxed for that, Criscuolo says.)
Even a personal loan from a friend or family member that was forgiven is considered taxable income, Criscuolo says.
That said, he adds, “One workaround is to specifically document the forgiven loan as a gift.”
If the money is really serious – and in this case, that would be anything over $ 14,000 – you probably want to bring in a tax professional, and the person who forgave the loan will likely need to file a gift tax return.
Alimony. It may be a lifesaver to get that relief from your ex-spouse, but, alas, “you will definitely be paying a tax on it,” says David Hryck, a tax lawyer with Reed Smith in New York City.
But it isn’t all bad news. “If you’re receiving property payments or child support payments, those will not be taxed,” Hryck says.
Renting out a room. Have you used Airbnb or another online site to rent out property? You may (or may not) be in the clear.
“According to the IRS, if your rental period is less than 15 days, you do not need to pay tax on the profits. After 15 days, you should be paying tax on the profits,” Hryck says.
Found money. Remember the $ 20 bill you found? There’s actually a name for that situation, Hryck says. It’s “the treasure trove tax. Let’s say you found an envelope of money. You should be paying tax on the sum. Same would hold true if you bought a car and there was a hidden amount of cash in the trunk,” Hryck says.
Class-action settlements. So a bank, gym or phone company or some other business did you wrong by charging fees that were later declared illegal by a court, and you received some money. Great – says the IRS.
If you accept settlement proceeds, “even if they are small, that information is usually reported to the IRS, and the IRS often does come after you for tax on those amounts,” Brotman says.
So if you haven’t picked up on the moral of the story yet, Brotman, who had the first word, can have the last one as well.
“In short, you should report all the income that you receive within a given year. However, forgetting to report an item or two does not necessarily mean that you are going to get audited,” Brotman says. “My advice is to be as careful as you can when preparing your taxes and to make sure that all the larger items are definitely reported.”